What the Insurance Act says
Section 13A of the Insurance Act 2015 provides that “it is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due in respect of the claim within a reasonable time”.
“A reasonable time” is not defined in the Act, but the Act does also state that it includes that time the insurer takes to investigate and assess the claim. Also, that when considering what “reasonable” means, several factors will be considered – such as the type of insurance, the size and complexity of the claim, compliance with any relevant statutory or regulatory rules or guidance and if there are any factors outside the insurer’s control.
An insurer has a defence to this type of claim if it can show that there was a genuine reason for disputing the claim or not making a payment.
How was this interpreted in practice?
In Quadra Commodities SA v XL Insurance [2022] EWHC 431 (Comm), Quadra had purchased grain stored in warehouses in Ukraine and paid for the grain on the receipt of warehouse receipts. However, the warehouses were involved in a fraudulent scheme meaning that the receipts were issued to multiple buyers and there was not enough grain available for all buyers. Quadra made a claim under its marine cargo insurance for these losses. The insurers denied the claim on the basis that there was no insurable interest and there was only pure economic loss (and no physical property loss). As a result, Quadra issued proceedings against the insurers for the denial of the claim and made a claim under Section 13A of the Insurance Act 2015.
The Court found that Quadra was entitled to indemnity under the policy (and so the insurers were wrong to decline the claim), but Quadra was unsuccessful in its claim for damages under Section 13A. The Court highlighted that what was “a reasonable time” and whether there were grounds for denial were two distinct questions and should be looked at separately. Further, that “a reasonable time” would not be more than about a year from notification of loss, and that it did not matter that insurers were ultimately wrong in denying the claim, what was important was that they had had reasonable grounds on which to deny.
It is important to remember that this case is persuasive only and not binding, as it is a commercial court decision, but it does suggest that it will be difficult for insureds to make successful claims under Section 13A as insurers just need to prove that there were “reasonable” grounds for denial. For insurers, it serves as a reminder of the importance of excellent customer service – responding to claims promptly and keeping insureds up-to-date of any delays but also, clearly documenting reasons for denials.
